Non-competition in commercial companies - who is covered?

Service

Particular prohibitions and restrictions on undertaking competitive activities may be associated with participation in a company or holding positions in bodies of commercial companies. The prohibition of competition in commercial companies is aimed at securing the interests of the company due to the fact that persons sitting in the bodies have access to information about the company and its undertakings. Dealing with competitive interests by board members could therefore have an impact on their managerial decisions.

Non-competition in commercial companies - who is covered by it?

The Commercial Companies Code differently regulates the subjective scope of the non-competition clause in relation to partnerships and capital companies.

Art. 56 § 1 of the Commercial Companies Code regulates the obligation of a partner of a general partnership to refrain from any activity contrary to the interests of the company. This provision applies accordingly to other partnerships. Pursuant to this regulation, the prohibition of competition applies to partners of partnerships, regardless of whether they manage the company's affairs and whether they are entitled to representation. The non-competition in commercial companies is valid as long as the partner's participation in the company lasts. The exception is, however, the stage of its liquidation - then the prohibition of competition in commercial companies ceases, unless the partner at the same time becomes the company's liquidator.

In the case of a limited liability company, the prohibition is regulated in Art. 211 § 1 of the Code of Commercial Companies and covers members of the company's management board. The subjective scope of the prohibition is wider in the case of a joint-stock company in which, in addition to members of the management board, also members of the supervisory board delegated to perform individual supervision on a permanent basis. Restrictions take effect on appointment and apply until the end of the term of office. Suspension of the rights of a member of the body does not release from the obligation to comply with the prohibition. Importantly, although the prohibition of competition in commercial companies will not apply by law after the termination of membership in the company's bodies, it is possible to include such a regulation in the company's articles of association or statute (Z. Jara (ed.), Code of Commercial Companies. Comment. 2, Warsaw 2017).

Violation of the non-competition clause entails, depending on the type of company, either the necessity to spend the benefits thus obtained, or the liability for damages. It may also be a reason for dismissal from the position held. Therefore, it is worth remembering about these restrictions and, when taking actions that potentially conflict with them, make sure you obtain the consent of the company.

What is a competitive activity?

In partnerships, a partner may not deal with competitive interests, in particular, participate in a competitive company as a partner in a civil partnership, general partnership, partner in a partnership or as a general partner in a limited partnership or limited joint-stock partnership. A shareholder may not be a member of a body of another, competitive company.

In the case of partnerships (general partnership, partnership, limited partnership and limited joint-stock partnership), such restrictions are related to the so-called obligation of loyalty to the company and result from the fact that companies of this type are based on mutual trust of partners.

It is worth remembering that these are only examples of competitive behavior, and in specific circumstances, the activity of a partner other than the normatively indicated may also be considered a violation of the prohibition. An example may be a sole proprietorship running by a partner - competitive to the partnership.

The scope of the non-competition clause in capital companies is slightly different. In a limited liability company, a member of the management board may not deal with competitive interests or participate in a competitive company as a partner in a civil partnership, partnership or as a member of the body of a capital company. He also cannot participate in another competing legal person as a member of a body - even if it is not engaged in economic activity. The prohibition also covers, in accordance with the Code of Commercial Companies, the holding by a member of the management board of a share in a competitive company amounting to at least 10% of the company's shares or stock. The prohibition will also apply when the shares or stocks do not exceed 10%, but their possession entails the right to appoint at least one member of the management board. The prohibition of competition in commercial companies in the case of members of the bodies of a joint-stock company was formulated in a similar way.

Start a free 30-day trial period with no strings attached!

It is worth noting that outside the scope of the prohibition is the possibility of participating as a partner in another capital company. The reason is that this type of activity does not pose a threat to the interests of the company due to the nature of the rights and obligations of a partner in a limited liability company or a joint stock company.

There is also the issue of understanding the concept of competitive interests, which cannot be dealt with by partners of a partnership and members of management boards of capital companies. Most often it is considered the same or comparable to that of the company as that which is aimed at the same or similar clients. In practice, dealing with this type of interest may consist in managing, controlling, supervising, advising, running a project or other types of involvement in the activities of a given entity. On the other hand, the competitiveness of interests is determined by the possibility of pursuing one interest without prejudice to the other (A. Nowacki, Limited Liability Company. Volume I. Comment. Articles 151–226 Commercial Companies Code. Warsaw 2018).

The company's consent to undertake competitive activities

Due to the fact that the basis of the non-competition clause is the need to protect the company's interest, it may release a partner or a member of the management board from the obligation to comply with it, if it deems that such activity does not pose a threat to its proper functioning. Consent may also be granted in the company's articles of association or articles of association.

In capital companies, consent is, in principle, expressed by the general meeting of shareholders or the shareholders' meeting. In the case of a partnership, the consent must be given by the remaining partners of the partnership.

Sanctions for violation of the prohibition

In a partnership, running a competitive activity without the consent of the partners may be associated with the necessity to provide the partnership with the benefits that the partner has obtained in connection with this activity. Such behavior of a shareholder may also be the basis for the shareholders to demand the dissolution of the company or the exclusion of a partner violating the ban from the company. Both in a partnership and a capital company, the company may claim compensation from a partner or a member of the management board, respectively, for causing damage to the company. Violation of the non-competition clause under the Commercial Companies Code may also be classified as an act of unfair competition.

When implementing various types of business ventures, it is worth examining your legal situation with an emphasis on non-competition in commercial companies. When determining whether the undertaken activity does not violate the non-competition clause, one should additionally make sure that the scope resulting from the act has not been modified in the company's articles of association or statute. The duration of the ban and the sanction for its violation may also be modified. Such precaution will help to avoid unnecessary complications and allow you to protect yourself by obtaining approval from the company. Subsequent consent is also exceptionally permissible.